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13 The Issues in 2001 -Will there be a hard landing ? -Have the TMT sectors bottomed ?

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14 The Issues in 2001 Will there be a hard landing ? The case for : –Negative wealth effect –Investment boom (especially IT) over –Consumer is tapped out –Corporate debt build-up

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15 The Issues in 2001 Will there be a hard landing ? The case against : –Room for interest rate cuts –IT and other technological investment still needed in a fiercely competitive environment –Other policy options available (tax cuts, fiscal stimulus, US dollar weakens) –US economy remains highly competitive

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16 The Issues in 2001 For a HARD LANDING scenario to happen, these must happen: -Core inflation rises rapidly, preventing a relaxation of monetary policy, -Wage rise (labor costs) outstripping productivity growth, -Oil prices skyrocketing out of control, -Extreme risk aversion spreading to investment grade credits, -Occurrence of an unexpected and contagious event risk that results in confidence flight. Our conclusion is that the odds of this happening is smaller than that of a SOFT LANDING.

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17 The Issues in 2001 The Fed and the other central banks have room to cut interest rates...

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30 Base Case Investment Scenario 1.A soft landing for the global economy - with the slowdown led by the US. 2.Inflation to remain subdued. 3.Interest rates to fall in 2001. 4.Oil prices to stabilize at current levels.

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33 What the Fed Funds Futures are forecasting? US Fed Funds futures are already forecasting almost 1% cut in Fed Funds rate by end Aug 2001 Bond Market Outlook

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34 Rates anticipation Bond yields have already priced in a soft landing Unless there is a hard landing, further yield decline would be a overreaction Therefore yields are likely to stay close to current levels unless the economic scenario worsens However, reality tells us there will always be overreaction Bond Market Outlook

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71 Investment Rationale Safe-haven status. High earnings stability (14% earnings growth in 2001 following a high 29% in 2000), low gearing, and still improving ROEs. Good corporate governance. Significant restructuring expected in the banking and conglomerate sectors - this will drive margin expansion and greater capital efficiency. Domestic liquidity is good with interest rates low, the banking sector's loan-to-deposit ratio low and the potential for US rates to fall further. We are overweight Singapore in our Asia-Ex-Japan portfolio. Singapore Equities - Overweight

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72 Investment Rationale Equity earnings yield are more attractive than rate of return on alternative investments. Valuations are attractive at current and forward PE multiples of 16x and 14x respectively, with positive earnings yield gap. Singapore Equities - Overweight

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74 Sector and Stock Picks SectorO/U/NStocksRemarks BankingO/WUOB, OCBCDivestment of non-core assets over next 1-2 years hold key to releasing liquidity back into banking system. As local banks focus on search for strategic partnerships or new markets, any positive news is expected to drive up share prices. ConglomeratesO/WSCIOne of the main proponents of corporate restructuring as management strives to improve capital management and focus on delivering shareholder value. Singapore Equities - Overweight

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78 The long run outlook for the financial sector remains positive. However, near term upside potential in the financial stocks is capped by asset quality concerns. Financials Performance vs. Interest Rate Cycle (1995-2000) Financial Services

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79 Asset Quality Concerns We recognized that NPAs are creeping up and do not rule out the possibility of a credit cycle. However the situation is in a better condition as compared to the 1991 recession. The strong earnings of the banks over the last few years will enable them to be resilient to the increase in NPAs. Financial Services

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81 Healthcare stocks outperform when its growth rate surpasses the market. Source: SalomonSmithBarney Note: Bars represent the difference in growth rate between the pharmaceutical sector and the S&P 500 Healthcare We are here

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85 Technology/Telecom Long term growth trends still intact –IT spending will remain an important driver of productivity –Broadband growth will accelerate –Alternate internet access devices becoming more widespread –Outsourcing trend will pick up

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86 Investment Outlook - Conclusions I –Base case scenario - soft landing of US economy but risk of recession not insignificant. –TMT sector bottoming out but some areas still vulnerable. On the other hand, certain stocks looking very attractive. –US dollar has likely peaked against the Euro. –Japanese recovery stalling and risk of recession increased.

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87 Investment Outlook - Conclusions II –The economic outlook is cloudy but unlikely to be disastrous. –Forecasting economic conditions is difficult enough. Even more difficult is predicting how markets will behave. –Therefore, focus on long term investing and stock selection. –Fundamentals and valuation do matter.

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